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Decentralized Exchange Founder Charged by SEC – On November 8, the U.S. Securities and Exchange Commission (“SEC”)settled charges against the founder of the decentralized exchange (“DEX”) EtherDelta. The founder agreed to: (i) a cease and desist from further operating an unregistered exchange, (ii) a total of $313,000 in disgorged profits, and (iii) a $75,000 penalty. This is the SEC’s first action against a crypto exchange.

Director Hinman Hints at ICO Guidance – On November 5, William Hinman, the Director of the Division of Corporate Finance of the SEC, spoke at D.C. FinTech Week, where he said plain English guidance for initial coin offerings (“ICOs”) is coming, though no timeline seems to have been given.

Ohio Allows Crypto Tax Payment – Ohio has become the first U.S. state to allow certain taxes to be paid in Bitcoin. Only businesses can do so at the moment, but the state is expected allow individuals to do so in the future.

OFAC Adds Crypto Wallets to Sanction List – On November 28, the Office of Foreign Assets Control (“OFAC”) announced it added two Iranian residents to its list of Specially Designated Nationals (“SDNs”) in connection with ransomware transactions. Generally, U.S. citizens are prohibited from doing business with anyone on the list. For the first time ever, the Iranian residents’ information on the SDN list included Bitcoin addresses.

CFTC Releases Smart Contract Primer – On November 28, the U.S. Commodities Futures Trading Commission (“CFTC”) released a smart contracts primer. Part of the primer explains that smart contracts are subject to existing laws, like contract laws, the Commodity Exchange Act, and the PATRIOT Act. Smart contracts may run afoul of existing laws by, for example, being used for transactions on unregistered facilities (e.g., an unregistered futures commission merchant), engaging in disruptive trading practices, or failing to meet financial reporting requirements.

AT&T and T-Mobile Sued Over SIM Swap Crypto Hacks – AT&T and T-Mobile are facing arbitration claims from victims of SIM swapping cellphone hacks. The claims are based on failure to adequately implement security protocols and train employees so that thieves could remotely take over SIM cards and access crypto wallets.

SEC Settles Charges Against ICOs – On November 16, the SEC announced charges against Airfox and Paragon based on their failure to register ICO tokens or qualify for an exemption from registration. Both issuers agreed to cease and desist from further violations, pay $250,000, offer refunds to investors, register the tokens with the SEC, and file periodic reports for at least a year. These are the SEC’s first cases imposing civil penalties for ICOs solely for securities registration violations. Notably, unlike many ICO-related charges, the SEC is allowing Airfox and Paragon to proceed with registering their tokens as securities.

Justice Department Probes Tether Manipulation – Bloomberg reported that the U.S. Justice Department is investigating whether last year’s crypto surge was driven by manipulation via Tether and Bitfinex. This adds to the criminal probe Tether is facing from the Justice Department.

SALT Lending Faces Investigation – The Wall Street Journal has reported that SALT Lending and former board member Erik Voorhees may be facing an SEC investigation for failing to register SALT’s fundraising as a security offering. Additionally, there are questions surrounding how tokens were distributed to insiders.

FEC Proposal OKs Crypto Mining for Political Campaigns – On November 13, the Federal Election Commission (“FEC”), the agency that enforces campaign finance law, released a proposed advisory opinion concluding that funds raised through contributing crypto mining processing power could be donated to political committees. The FEC’s commissioner’s will vote on the opinion December 19.

Coinbase Insider Trading Lawsuit Expanded – On November 20, an amended class action complaint was filed against Coinbase based on alleged insider trading relating to Bitcoin Cash’s listing. As discussed in last month’s update, a judge previously dismissed a separate lawsuit based on similar claims. If Coinbase wants to move on from the controversy, it may have to fully face the insider trading claims.

State Cease-and-Desist Orders Continue – State regulators continue to take action. Texas regulators issued an emergency cease-and-desist order against an Australian crypto cloud mining company based on claims it was selling unregistered securities. North Dakota issued a cease-and-desist order against a Russian ICO that allegedly impersonated a Liechtenstein bank. Additionally, Colorado has brought cease-and-desist actions against four ICOs based on the sale of unregistered securities.

CFTC Fines Trader for $1.1M Scam – On November 9, the CFTC settled charges against a trader for a fraudulent crypto scheme. The trader misappropriated crypto from his employer to his own personal account, and gave fraudulent explanations when questioned about it. After being fired, the trader continued to solicit clients, falsely representing that he was making low-risk investments when actually making high-risk ones, and concealed losses by sending false account statements. The settlement includes $1.146M restitution payments, a permanent trading and registration ban, and permanent injunction from further CFTC-related violations. Separately, the defendant was sentenced to 15 months on related criminal charges.

Other Lawsuits and Charges:

Winklevosses Bring Suit Against Shrem – The Winklevosses have initiated a lawsuit against Charlie Shrem alleging Shrem withheld 5,000 BTC that he was supposed to buy on behalf of the Winklevosses.

FBI Arrests Arisebank CEO – The Federal Bureau of Investigation arrested the CEO of AriseBank for securities and wire fraud.

Ripple Lawsuit Moved to Federal Court – Ripple Labs has moved to consolidate claims against it into a class-action suit, and to move the suit from state to federal court. You can read about Jake Chervinsky’s breakdown of why the move to federal court was a strategic here.

TAKEAWAYS FROM NOVEMBER

Blatant Fraud – Regulators tend to mainly go after blatant fraud (e.g., AriseBank and the fraudulent trader facing CFTC charges). Those that act in good faith and are willing to work with regulators, however, don’t have much to fear from regulators. Airfox and Paragon, for example, are being allowed to move forward and register their tokens despite securities violations.

DEX Regulation – Agencies face problems regulating DEXs like EthereDelta, since they’re intentionally built to have no central actors. At some point, a distributed system becomes sufficiently decentralized that regulators can’t practically do anything to regulate it. The EtherDelta charges hint at the difficulties, since the founder wasn’t banned from capital markets activities, and received a relatively low fine; check out Leigh Cuen's and Nikhilesh De's great write-up on the nuances of the settlement.

Manipulation – As the Justice Department’s Tether probe suggests, crypto needs to establish that it’s not subject to manipulation before it’s more widely adopted. Regulatory progress, like the approval of Bitcoin exchange-traded funds, also depends on it.

Insiders – With increasing frequency, we’re seeing insider trading-related issues (e.g., Coinbase and SALT). You can expect to see even more enforcement efforts surrounding insider trading over the next year. Protip: “but everybody does it” is not a defense.

RECENT RESOURCES

State Initiatives – Brady Dale wrote an awesome overview of state regulators’ efforts to rein in crypto bad actors.

Chairman Clayton’s Consensus Speech – On November 27, SEC Chairman Jay Clayton gave a fireside chat at Consensus: Invest in Manhattan. You can check out an overview of the key takeaways from his talk here.

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